The Consumer Spending Mirage - Fits what I see when I go about town

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april 9, 2008, Stocks riding high on illusions of consumers continuing to spend may be in for a nasty surprise

by Michael Mandel

If you are an investor, this is the moment in the business cycle when fortunes can be won or lost. The U.S. economy is in recession, for the fourth time in the past quarter century. Will the stock market soon take off with a whoosh, as it did during the downturns of 1981-82 and 1990-91? Or will stocks continue to slump, like they did during the 2001 recession and beyond?

Forecasting the stock market is a fool's game—but there are grounds to believe there's another drop in the market yet to come. The reason: a broad decline in consumer spending, which so far has been masked by a quirk in the government's statistics. Combine that with a rapidly unraveling job market, high energy prices, and the continuing credit crunch, and you have the recipe for a drop in consumer stocks. A big decline there could take the rest of the market down with it.

Right now it's looking like the recession started in November, 2007. That's when private-sector employment peaked, according to the latest job report from the Bureau of Labor Statistics. Since then, the private sector has shed 300,000 jobs, with the cuts concentrated in construction, manufacturing, retail trade, and temp services.Consumer Spending's Nice Ride

Despite those job losses, government statistics show that consumer spending, although slowing, is at an all-time high when adjusted for inflation. In fact, if you go by these numbers, it looks like Americans have boosted their purchases at a 1.4% annual rate since last summer, a respectable pace considering the chaos in the financial markets and the massive overhang of consumer debt they have piled up since 2000.

The apparent ability of the U.S. consumer to keep spending helps justify the remarkable rise in many top consumer stocks over the past few months, despite the housing bust. Increases in share prices since the end of August, 2007, include Wal-Mart (WMT), up 24%; Colgate-Palmolive (CL), up 19%; Avon (AVP), up 15%; Coca-Cola (KO) and McDonald's (MCD), both up 13%, and Procter & Gamble (PG), up 7%. Meanwhile the S&P 500-stock index (MHP) as a whole has lost 8%.

In one sense the strength of these particular companies isn't a surprise. They have all ridden the two-decade-long consumer spending boom, giving investors average annual gains ranging from 14% to 17% since 1988, including dividends. By comparison, the S&P 500 has returned an average of 11% per year over the same period.Personal Consumption: Quirky Stats

But a closer look at the numbers shows that the consumer spending boom may already have come to an end, without investors noticing. The problem is this: What the government calls "personal consumption" is actually a grab bag of items, some of which don't really fit the usual notion of consumer spending. For example, the nation's current annual personal consumption of $10 trillion includes about $1.8 trillion in outlays by Medicare, Medicaid, and private health insurance providers. This is real money, but consumers don't control or even see most of it, since it usually goes right to the health-care provider.

The government's count of personal consumption also includes "imputed" categories, that is, entries that don't involve any money changing hands. Two of the biggest examples: $1.1 trillion for "rent" that homeowners theoretically pay to themselves to live in their own homes, and $240 billion for "services furnished without payment by financial intermediaries"—in other words, the value of services like no-fee checking accounts.

In fact, once medical outlays and those two imputed categories are set aside, it turns out that the rest of personal spending has actually fallen since November, adjusted for inflation. The decline is pretty much across the board: inflation-adjusted purchases of food, clothing, furniture, and motor vehicles are all down. The part of health-care spending that individuals control most directly—prescription drugs—is down as well.Consumer cliffhanger

Spending on vices is also dropping. According to the government's figures, alcohol consumption and casino gambling have been declining since November. Indeed, Nevada gambling revenues are down by 4% over the past year.

There are signs that affluent individuals are pulling back, too. Purchases of jewelry and watches are off 3.9% since November, adjusted for inflation. A survey of high-net-worth Americans found that 42% are likely or very likely to change how they budget and spend their money. "These folks are tightening the belt a little bit," says George H. Walper Jr., president of Spectrem Group, the consulting firm that commissioned the survey. "Just because someone is wealthy doesn't mean that they don't get cautious."

Some categories of spending are still rising. Real outlays for the category "religious and welfare activities," which includes political donations, are up because of the Presidential campaigns. And at least up to this point, Americans still are buying more televisions and talking longer on their phones.

Some economists think the combination of economic stimulus checks soon to arrive from the federal government and lower interest rates should keep consumer spending from falling off a cliff. "We think consumers will narrowly skirt a downturn despite the recession in the overall economy," write Richard Berner and David Greenlaw of Morgan Stanley (MS) in a just-released report.

Certainly, that's what the market seems to be expecting, given the performance of the top consumer stocks. But if the decline in consumer spending continues, it's going to be hard for the market not to follow.

I have written about the rent that homeowners "pay" to themselves, but I had no idea that there's still another 240 bln that account holders pay to themselves. Where can see a detailed breakdown of "consumer spending" by category?

I certainly think the spending boom is at the very least in a significant pause, I'm seeing it in my business this year. when presented with options my customers are choosing low price over quality 9 times out of 10....

I have worked retail for several years. I am in mid-level store management right now. I don't want to say exactly what company I work for, but it is in the top 3 largest. I work at a store in a major city.

There have been some crazy things going on recently. The changes that we are being asked me make per corporates direction makes me think that the people at the top think something VERY big is going to be happening to the economy soon. I don't think the media or the government is giving us the full details of what is actually going on, but I think the CEO's and others at the top are fully aware and are making plans.

For one thing I check sales every day. At the store level we usually compare what sales are today compared to sales for the same day, week, month, and year last year. Sales at our store, our district, and company wide have taken a HUGE drop compared to the same time last year. When I looked at them today my store and every store in our district was down over 30% for the same time last year. The company as a whole is also in the negative for the same time last year. (but not as much, but it gets lower every day)

Honestly at my store I could say that we have done everything in our power at the store level to increase sales, but it just isn't happening. Departments like electronics are literally almost completely empty the entire day. The only departments that actually are getting sales are consumables, health, and chemicals. Just walking the store these are the only departments I ever even see people in ever since christmas ended.

Sometimes I will cover the service desk so a team member can take a lunch/break. When I do I sometimes process peoples credit card payments which lets me see how much they owe and how much they are paying. There are tons of people with THOUSANDS of dollars on their card only making minimum payments. These balances are usually at interest rates over 20%. Then there are people bringing in checks for the full amount, but they are BALANCE TRANSFER checks.... they are just moving it to other cards.

But that isn't what really worries me. What worries me is the changes corporate is making. I have worked here for years, and in the last 4 months I have seen more changes than all that time combined.

We are getting emails all the time from corporate telling us to reduce costs anyway we can. We recently got one telling us to start pulling fluorescent light bulbs, that we don't need all of them in order to provide illumination.... and those bulbs barely use any power.

Corporate has instructed all stores to lower the AC. It has been lowered enough to the point we get complaints from team members and customers.

Corporate has sent us emails telling us to make sure we fill bags to the absolute possibly maximum. They are not even sending us large bags anymore to some stores.

Corporate has recently eliminated (what I would estimate based on how many positions we lost vs the thousands of stores we have) several thousnad management positions at *all levels* of management at stores. This NEVER APPEARED ON THE NEWS! I suspect because it was not a traditional lay off. What corporate basically told us was "Your position is eliminated, but you are not laid off. Once you quit/get your self fired/whatever your position just won't be filled again" So we are basically slowly losing jobs as people company wide quit, get fired, etc.... but the jobs are never filled again. So basically we are cutting jobs, but the way it is being done is preventing it from getting reported in the media or tracked by the government as job losses.

No non-management positions have been eliminated, instead hours have been cut for them.

Raises this year have also been lowered in amount compared to in previous years. They have been lowered enough that corporate is keeping it a secret until we have to tell team members.

The company is also buying less. Our distribution centers are sending us, for example, 3 of a certain item when normally we would get 50.... and they don't send us more until those sell. I have not been able to keep departments full of product despite contacting corporate and asking for more because we are being sent such small amounts of product.

We have had trucks cancelled all the time now simply because we sold so little that they can't justify sending so few items to a store.

People are simply NOT buying things. They are not buying anything that isn't a consumable basically. I asked our pricing team to do a store mark down and lower the price on almost all of our TVs by 30-50%. We still have not sold a single one in over a week after! Our TVs were not priced very high to begin with.

Our pricing team is also being sent price increase changes from corporate in huge numbers. I am talking entire aisles of product for them to raise the prices on. The other day we got a STACK of pages of product to increase prices on. We thought it HAD to be a mistake because that has simply never happened before. We have emailed corporate asking if it was a mistake... we have not heard back yet, but I suspect it was not.

Many stores are now changing to non-overnight stores. They will be closed overnight and ALL power except in office areas will be cut overnight to save on costs.

There have even been changes to job descriptions recently. Corporate is basically giving job dutys to people at lower levels which used to be reserved for people at higher levels. Even some management tasks are being given to people in non-management positions. Basically they are paying people less to do what people used to get paid more to do.

Things are NOT looking pretty right now. I can tell you from a consumer spending point of view something is definantely going on.... All these changes tell me the people at the top are trying to brace for something big that is going to be happening to the economy.__________________

Not from today, but some day last week... 8:01[AEO] American Eagle Outfitters March same-store sales down 12%8:01[GPS] Gap March same-store sales down 18%8:01[DDS] Dillard's March same-store sales down 10%8:03[FDO] Family Dollar March same-store sales down 4.4%8:02[ANF] Abercrombie & Fitch March same-store sales down 10%

Wal Mart has also slashed it's advertising budget... was one of the first things to go. I do a lot of print-work design and Wal Mart is one of my clients. It's a subtle move, but now all their stuff is very generic and derived from a "1 look" template so they can use stuff over and over. Some examples are Point of Purchase in store displays and Line Looks for DVD bundles which used to be designed specifically to highlight and correspond to different promotions. They have canned all that, redesigned their branding look or "style guide" and are going plane jane for everything now. That move alone put alot of people out of business in the creative industry. Something most people don't really realize. Notice their new tag-line went from "Lowest Prices Always" to "Save Money. Live Better".

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Here in upstate of South Carolina, Walmart numbers are down and customers are mostly buying essential food items. Many food items usually in the store were out of stock. This has been going on for awhile (since Jan.). Costco has very few customers compared to 6 months ago and mostly food essentials selling. Thought we would find a few items at a Goodwill store a couple of days ago. We went to four of them and I almost could not find a parking spot at any of them. I don't know why but this blew me away. This really hit hard how our economy is getting hit. My wife made the comment to me --- look at all the nice vehicles in the parking lot; new SUV's, Town Cars, Buicks, etc. Inside there were alot of people in very nice clothes buying stuff. Usually there are hardly anyone at these Goodwill stores and about have them to ourselves. It was like Walmart in the good times.

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I Live in central New Jersey. this winter was slower then the last one for me.I am a HVAC Contractor A lot of my work comes from home warranty companies, but with the housing market being so bad no one is buying and most homeowners that get a home warranty drop it after the first year.

also most of the supply houses that I buy parts from are hurting big time too.this housing thing hurt a ton of people in my area lot of people took loans out on there houses when propertys went up 3x and 4x in value like over nite.I also joined up with a realtor website everytime a house goes on the market for less then 250k I get it emailed to me or them emailed to me in my county with the address lot and block taxes etc.I noticed prices are dropping big time.now I am seeing houses that were selling for 250k a year or two ago going for 190k and 180kI like to go to the county tax records online and see what people had paid for thses houses they have up for sale and I been seeing most of them were bought in 2004 and 2005 and they are selling for way less then what they paid in my areatax records are easy and fast to look up just type in the house address and the record come up from county tax record all free also just about every street in my county has a house for sale and there just sitting.

there was a nice italian restaurant and a fish market up the street from me they closed up shop a month ago, was told the owner could no longer pay the rent there

also I have a friend that lives a few miles away from me and he said he went to get some hot wings and pizza for him and his wife and the pizza place around the block from him had folded up also the bar and grill next to it.

things are bad

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The CA. central valley is starting to feel it, peole are talking ,starting to drive smaller cars and spend less....the banks are cutting HELOCS in half to people with good credit and substancial equity in there homes ....others have plenty of money in the bank ,rentals, 780 and up Fica score and are unable to get new HELOCS. And new house prices have fallen 30 %....although San Louis Obispo has maintained it's housing values very well ....some areas around San Jose are holding up decent also.Texas....I purchased a couple of properties just west of Austin on a resort lake 2 years ago ,recently had them re-apraised for almost the original price, that was a good thing.....but there's plenty of foreclosures and nothing is selling.

Gap, the largest U.S. apparel chain, said sales plunged 18 percent, led by a 27 percent decline at its Old Navy chain. Analysts expected a 7.8 percent drop.

Teen retailer Abercrombie & Fitch Co. said sales retreated 10 percent. American Eagle said same-store revenue dropped 12 percent and cut its first-quarter forecast to as little as 18 cents a share from as much as 27 cents.